WASHINGTON — Industry observers think that Fannie Mae and Freddie Mac, now in conservatorship, could be reconstituted in one of several different forms. But they admit that the current, ever changing financial crises and the upcoming elections have put reorganization–in other times a huge consideration–on the back burner.
Some say the question of the future form of Freddie and Fannie revolves around three basic models: whether they should continue as government-sponsored enterprises or become private-sector companies or morph into some form in between. The third model would treat them as utilities, meaning that they will still have stockholders but would be limited in terms of how much money they could make.
Alex Pollock, a resident fellow at conservative think-tank American Enterprise Institute, has suggested a fourth model. Pollock said he favors breaking them into two pieces and turning the part of Freddie and Fannie that deals with affordable lending into a government agency–kind of a second Federal Housing Authority–while the part of the enterprise that brings liquidity to the secondary market could be privatized.
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Terrin Griffiths, an economist and industry analyst for the California and Nevada Credit Union Leagues, said she doesn't think the government wants to run the mortgage market on a permanent basis so that some type of privatization similar to what existed previously would be likely to result.
Griffiths said she has heard talk of the adoption of a European-type model where banks sell some type of mortgage bond and keep the mortgages on their books. In this model, there is no Fannie or Freddie, but banks and credit unions retain ownership of the mortgages they make.
At present, there is no leading theory on which form the companies should take. And, although undergoing significant changes in personnel and policy, neither Fannie nor Freddie has indicated whether any of the models will be embraced by the companies themselves.
Nevertheless, some hints on the future direction of the GSEs come through, either found in words spoken by newly appointed GSE executives or in the actions they have already undertaken.
At the Mortgage Bankers Association convention held Oct. 20 in San Francisco, reports indicated a willingness on the part of the GSEs to jettison allegiance to profit in favor striking a balance between serving shareholders and the housing markets. "We need to shed old traditions and policies and do what is necessary to serve the market–all the while working to bolster our safety and soundness," Fannie Mae President Herbert Allison told conference attendees.
The GSEs need to meet the bottom line has been suggested by many as the reason why they got into toxic investments such as Alt-A and subprime loans and had to restate several years of earnings after accounting scandals came to light.
Paul Schieber, an attorney with Blank Rome, said there's also been talk that with less pressure to make profits, fees could go down in the short-term. Indeed, Fannie recently rescinded a decision to impose a quarter-point increase in the adverse market delivery fee in November.
David Moffett, the head of Freddie Mac, said his company is reviewing pricing with the intent of readjusting "for the 30-year risk we are taking."
TowerGroup analyst David Hamermesh said he expects Fannie and Freddie's ability to lobby to be limited. At a recent congressional hearing Federal Housing Finance Agency Director James Lockhart told lawmakers that he has halted lobbying and all political activities by the enterprises.
Fannie and Freddie were widely viewed as formidable lobbyists. According to the Center for Responsive Politics, the enterprises spent $167 million on federal lobbying over the past decade.
Hamermesh said risk management protocols placed upon the enterprises will be more rigorous–that's where they got into trouble. Expect credit risk management to be a huge focus, he said, including keeping down payment assistance programs out as that improves the risk profile of new loan origination. Ninety-five percent loan-to-value has a proven track record. Don't expect to see 97% LTV, he warned.
That could dash industry hopes for a loosening of the down payment required. Scott Toler, president/CEO for Credit Union Mortgage Association, said that Fannie and Freddie's new regulator might tighten up underwriting standards while addressing an industry hope that the 5% down payment requirement be loosened.
Investment in subprime loans, now the bane of the financial markets, could be a thing of the past. Hamermesh said that because investing in subprime and Alt-A loans was outside their mission, there will be mechanisms to keep them from going outside their agenda.
Fannie Mae's Allison has said that Fannie is evaluating its risk-management efforts, underwriting guidelines, pricing and fees in light of the market conditions.
Internally, FHFA has made a number of changes to the enterprises. New boards have been formed and both Fannie and Freddie have new CEOs. Allison was previously president/CEO of Merrill Lynch. David Moffett presides over Freddie Mac; he previously served as the vice chairman and chief financial officer of US Bancorp.
Their immediate predecessors at Fannie and Freddie were excused and stripped of their so-called golden parachutes.
As part of the changes, officials at Fannie and Freddie have said they are hard at work shoring up the secondary market. Fannie has increased the flow of liquidity to the market by purchasing or guaranteeing $44 billion in new business in September compared to $40 billion in August.
The enterprises said they are also taking steps to help lenders in the primary market. Allison said Fannie is funding loans made through the Chicago Home Loan Bank's mortgage partnership finance program and has introduced a streamlined rate-lock commitment for multifamily lenders.
The GSEs have also introduced programs to help borrowers. Fannie announced a new antiforeclosure measure called "second look," where servicers and attorneys review foreclosure referrals to see if there is any way to help the homeowner.
Fannie has increased its foreclosure efforts. Workouts averaged 10,000 in January but have increased to an average of 13,000. A variety of strategies has been employed including bridge loans and incentives for attorneys to send foreclosures back to Fannie loan servicers for another workout attempt, Allison told bankers at the San Francisco conference.
Pollock said he's not sure if the GSE era has ended, but it has certainly changed. Others said they doubt that Fannie and Freddie will be as powerful as they once were.
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